February 21, 2012

When Emissions are Outsourced

At first glance, CO2 emissions growth from fossil fuels and industrial processes look fairly benign for developed countries. Compared to a 1990 baseline, emissions peaked in 2007 at just 0.4% above the baseline and then dropped for the next two years (based on UNFCCC data). By 2009, emissions for developed countries were 8.7% below the 1990 level. This drop, of course, wouldn’t have happened without help from the global financial crisis. But there is more to this story.

Soon after, in 2010, global CO2 emissions increased by the highest recorded rate as the world bounced back from the financial crisis. Emissions for developed countries followed suit but remained well below the 1990 level. Does this mean that emissions in developed countries have stabilized even as their economies continue to grow?

The missing piece of the puzzle is the significant increase in outsourced production starting in the mid-1990s.

When production is outsourced to developing countries, developed countries see relative stability in their territorial emissions, which are emissions produced within their geographical boundaries. But in reality, emissions are relocated to the developing world and outsourced along with the production. When finished products are delivered to consumers, those emissions are embodied in the products but are not attributed to those consuming the products. The reporting protocols today are designed for territorial emissions, so outsourced emissions remain entirely with countries that produce goods and services for export.

This is similar to companies reporting only their scope 1 and 2 emissions and taking no responsibility for scope 3 emissions. At a minimum, developed countries see a highly skewed picture of their own emissions. While it may appear that their absolute emissions are stabilizing, consumption-based accounting shows that emissions have actually increased significantly and more than wiped out the reductions made under the Kyoto Protocol.

The chart below (from Peters et al. in Nature Climate Change) captures the net effect of international trade and shows how consumption-based emissions have increased much more rapidly than the production-based territorial emissions for developed countries.

The situation in the US appears worse. Territorial emissions peaked in 2007 at 20% above the 1990 baseline and were 7.9% higher by 2009 before full recovery from the financial crisis – well above the emission growths of developed countries as a whole. Adjusted for net international trade, consumption-based US emissions grew even faster than that relative to baseline – over 29% higher in 2007 and nearly 16% higher in 2009. In the chart below, I have combined data from two sources (UNFCCC and Peters et al in PNAS) to approximately plot the US emissions profile through 2009. Data for 2010 are not available yet, but the post-crisis US emissions are likely to have resumed their upward trend.

We can expect current annual US emissions to be roughly 8-9% higher than territorial emissions after adjusting for trade. This may look like a small increase in the grand scheme of things, but it makes it much harder to return to the reference emissions of 1990 at the national level (according to the IEA, emissions need to be roughly at the 1990 level by 2035 in order to keep the average global temperature increase under the 2 degrees C). Back in 1990 when the US was less dependent on imports, trade would have increased emissions by about 1.5%.

The first takeaway from all this is that a full system perspective is needed to really understand things like national and regional CO2 emission trends. As any LCA practitioner will tell you, how system boundaries are drawn can make a big difference. Second, consumption of material goods continues to drive increases in emissions even as a big part of the production is outsourced. Despite transitioning toward a more service and information based economy in recent years, there are no signs of emissions leveling off anytime soon in the world’s largest economy.

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Kumar Venkat is president and chief technologist at CleanMetrics Corp., a provider of analytical solutions for the sustainable economy.